Measures of consumer expectations for inflation for the next 12 months increased in early February, indicating that American households believe inflation will be much higher next year.
Consumers expect prices to rise 4.3%, a significant increase from 3.3% in January. This is the highest expected inflation since November 2023, and it is only the fifth time in 14 years that a University of Michigan survey recorded profits of more than 1% in a month.
This profit was driven by increased expectations for higher prices for Democrats. Republican consumers are hoping for zero inflation next year, slightly lower than a month ago. Independents are expected to increase by about 3% to 3.7% from one month before the end of 2024. Democrats, who had anticipated an inflation of about 2.5% before the November election, expect prices to rise by 5.1% this year. .
Long-term inflation expectations, a measure of changes in average price forecasts over the next five years, have increased by up to 3.3% from 3.2% in the previous month. This was also driven primarily by surges Democrats' fears about inflation. The average expected inflation rate for Democrats rose to 4.2%, below 4% a month ago, up from below 3% before the election. Long-term expectations remained unchanged among independents. Among Republicans, the long-term expected inflation rate fell to 1.5%.
The partisan gap in inflation expectations has always grown over the past four years.
The Federal Reserve is closely watching inflation expectations. Many economists and Fed officials believe that rising inflation expectations could lead to an actual increase inflation, but this evidence is mixed.
The University of Michigan's Consumer Sensation Index fell to 71.1. This is the lowest since July. The Economist was hoping for a 74 read. The current condition indicator fell from 74 to 68.7, while the expected economic condition indicator fell from 69.3 to 67.3.
“Consumer sentiment has declined for the second straight month, dropping by about 5% to reach its lowest reading since July 2024,” said Joan Huss, director of the Consumer Research.
Personal fiscal expectations have fallen by about 6% since January, a decline seen in all political affiliations, reaching its lowest level since October 2023.
Surprisingly, Republicans' current ratings fell from index reads of 57.5 to 51.0, reversing profits, primarily after the November election. The expectations among Republicans remained largely unchanged, continuing to reflect the surge in post-election optimism. Meanwhile, Democrats' expectations continue to deteriorate, with the index level now falling below half of what it was before the election. The expectations among independents skated for two consecutive months.
